Question

The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $305,000. Of this amount, $290,000 is subject to five-year MACRS depreciation. The balance is in nondepreciable property. The contract covers six years; at the end of six years, the non depreciable assets will be sold for $15,000. The depreciated assets will have zero resale value. Use Table 12-12.

The contract will require an additional investment of $63,000 in working capital at the beginning of the first year and, of this amount, $43,000 will be returned to the Spartan Technology Company after six years.

The investment will produce $102,000 in income before depreciation and taxes for each of the six years. The corporation is in a 25 percent tax bracket and has a 14 percent cost of capital.

a. Calculate the net present value.

Answer 1